Top Dividend Stock: Starwood’s 8.8% Yield Is Hard to Ignore

Top Dividend Stock: Starwood Producing Higher Returns

Finding an opportunity in a crisis is an art that not many investors master. Barry Sternlicht created Starwood Property Trust, Inc. (NYSE:STWD), one of the top dividend-paying real estate investment trusts (REITs), at a time when everyone else was running away from property lending following the great recession of 2008.

After the collapse of the mortgage-backed securities market, Sternlicht seized an opportunity created by a huge gap in the commercial lending market as big banks and other traditional lenders withdrew from this very important segment of the market. Income investors who trusted his business acumen have benefited from the top dividends that Starwood Property Trust has generated since, as it has become the largest commercial mortgage REIT in the U.S.

With a market capitalization of more than $5.0 billion, this REIT yields 8.8%. This is not an ordinary dividend if we compare it with the other investment options we have in the market. The average dividend yield offered by companies listed on the S&P 500 index is just about two percent. The government’s 10-year bond yield is offering a yield at about the same level after a massive sell-off in Treasury bonds following Donald Trump’s victory in the presidential election.

Starwood Property Trust isn’t a traditional mortgage REIT which just invests in high-yielding mortgage-backed securities. Instead, its primary business is providing direct financing for real estate projects that don’t pass the strong credit criteria set by traditional sources.

Unlike banks, which are struggling under a very tight regulatory environment, private lenders have more flexibility in managing and evaluating risk for commercial borrowers. Regulations require banks to set aside a certain amount of cash against the commercial real estate lending on their books. But private lenders such as Starwood make their own rules when it comes to maintaining reserves for future losses. This is one of the main reasons that Starwood was able to grow its investment portfolio rather quickly and invest in those assets that banks have backed away from.

From a fundamentals perspective, Starwood Property Trust doesn’t have a large history to analyze, because the company was established in 2009. But this REIT is expanding fast, with a total capital deployed since inception of over $28/0 billion. Its lending business is diversified, including the medical sector and commercial offices, leading to stable income opportunities. (Source: “Investor Presentation — September 2016,” Starwood Properties Trust, Inc., September 2016.)

In the last quarter, the company produced over-seven-percent returns on its asset portfolio, generating about $350.0 million in revenue from its lending business. And Starwood Property Trust’s $0.48-per-share quarterly dividend payout makes it a compelling investment case for income investors. (Source: “Starwood Property Trust Reports Results for the Quarter Ended September 30, 2016,” Starwood Property Trust, Inc., November 2, 2016.)

The Bottom Line on Starwood Properties

Having said that, there is no doubt that lending to real estate companies is inherently risky, as during economic cycles, commercial real estate is among the first asset classes which get deserted.

But after Trump’s win in the U.S. presidential election, real estate and infrastructure investment should get a major boost. Creating jobs by investing in those projects which directly benefit the U.S. economy was a key camping promise by Trump.

If this materializes, then REITs are going to be the major beneficiaries, as the appetite for lending will increase–and so does the opportunities for companies like Starwood Property Trust.

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